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Challenges with Technology & Compliance Presented by Sean J. Kulczycki, CRCM Principal September 13, 2007 Regulations on E-Banking E-Sign Act Online Loan Applications Opening Accounts Online Online Statements Website Compliance New Payment Methods Electronic Check Conversion Agenda

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challenges with technology compliance

Challenges with Technology & Compliance

Presented by

Sean J. Kulczycki, CRCM


September 13, 2007

Regulations on E-Banking

E-Sign Act

Online Loan Applications

Opening Accounts Online

Online Statements

Website Compliance

New Payment Methods

Electronic Check Conversion

regulations on e banking what s the scoop
Regulations on E-BankingWhat’s the Scoop?

Many of the requirements currently listed within the

regulations are not actual requirements:

  • March 30, 2001: Federal Reserve issued Interim Final Rules Amending Regulations B, E, M, Z and DD
  • August 2, 2001: Federal Reserve lifted mandatory compliance dates
  • April 30, 2007: Federal Reserve proposed withdrawing interim final rules
regulations on e banking where does that leave us
Regulations on E-BankingWhere Does that Leave Us?
  • Okay to rely on interim final rules
  • Otherwise, rely on regulations as they were prior to 3/30/01 Interim Final Rule!
  • Good idea to rely on proposed guidance now
e sign act consumer consent provisions
E-Sign ActConsumer Consent Provisions

Section 101(c) of the E-Sign Act allows disclosures

required to be in writing to be provided electronically


  • The consumer has affirmatively consented to such use and has not withdrawn such consent
  • The consumer, prior to consenting, is provided with a clear and conspicuous disclosure statement that meets the following requirements
e sign act clear and conspicuous statement
E-Sign ActClear and Conspicuous Statement

Statement must

  • Inform consumer of any right to have the record provided or made available in non-electronic form
  • Inform consumer of their right to withdraw consent and of any conditions, consequences or fees in the event of such withdrawal
e sign act clear and conspicuous statement7
E-Sign ActClear and Conspicuous Statement
  • Inform consumer of whether the consent applies only to
    • The particular transaction that gave rise to the obligation to provide the record
    • To identified categories of records that may be provided or made available during the course of the parties relationship
e sign act clear and conspicuous statement8
E-Sign ActClear and Conspicuous Statement
  • Describe procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically
  • Inform consumer how they may obtain a paper copy of an electronic record after consent and whether any fee will be charged for such copy
e sign act statement of hardware and software
E-Sign ActStatement of Hardware and Software

Consumer must also be provided with a statement of the hardware and software requirements for access to and retention of the electronic records

e sign act confirmation of consent
E-Sign ActConfirmation of Consent

Consumer must consent electronically, or confirm consent electronically in a manner that reasonably demonstrates the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent

online loan applications home equity lines of credit heloc
Online Loan Applications Home Equity Lines of Credit (HELOC)

If an application for a HELOC is provided on-line,

the following additional disclosures must also be provided

  • Application disclosure*
  • Home equity brochure*(“You’re Home Is On the Line”)

* E-Sign disclosures not required

online loan applications providing heloc disclosures
Online Loan Applications Providing HELOC Disclosures

Recent proposed guidance from the FRB indicates that banks have flexibility in providing disclosures and provides the following example methods

  • Automatically appear on screen
  • Appear elsewhere on the page if a clear reference is made
  • Provide link to disclosures if it cannot be by-passed
online loan applications general purpose applications for helocs
Online Loan Applications General Purpose Applications (For HELOCs)

The Commentary to Section 226.5b(b) of Regulation Z states that the disclosure and brochure need not be provided if a general purpose application is provided unless the application or accompanying information indicate that it can be used to apply for a HELOC

online loan applications closed end mortgage loans
Online Loan Applications Closed-End Mortgage Loans

If an application for an ARM loan is

provided online, the following

additional disclosures must also be


  • ARM program disclosure*
  • CHARM booklet*

* E-Sign disclosures not required

online loan applications arm disclosures
Online Loan Applications ARM Disclosures

The proposed rule from the FRB requires ARM

disclosures to be provided using same methods as


  • Automatically appear on screen
  • Appear elsewhere on page if clear reference is made
  • Provide link to disclosures if it cannot be by-passed
online loan applications general purpose applications for arms
Online Loan Applications General Purpose Applications (For ARMs)

ARM Loan Applications

No exception exists, as with HELOCs, stating that ARM disclosures need not be provided with generic application forms

opening deposit accounts things to consider
Opening Deposit Accounts Things to Consider

Things to consider when establishing such a process


  • Providing initial disclosures
  • Funding the account
  • Identification and BSA considerations
opening accounts online required disclosures
Opening Accounts Online Required Disclosures
  • Initial Truth in Savings*
  • Initial Electronic Funds Transfer*
  • Initial Expedited Funds Availability*
  • Initial Privacy Disclosures*
  • Check 21 Disclosure* (depending)

The following disclosures must generally be provided prior to an account being opened or service provided

*E-Sign disclosures are required for above

check 21 disclosure requirements
Check 21Disclosure Requirements
  • Account Opening: Must be provided at time customer relationship is initiated if paid original (or substitute) checks are provided with periodic statement
  • Subsequent Disclosures
    • Customers that request a copy of an original check and are provided a substitute check
    • Customers that receives an unpaid returned substitute check
opening accounts online method of disclosure
Opening Accounts Online Method of Disclosure
  • Disclosures must be provided clearly and conspicuously, in writing and in a form the consumer may keep
  • No additional requirements regarding the manner in which the disclosures must be provided e.g., direct on screen versus link that cannot be by-passed
opening accounts online funding the account
Opening Accounts Online Funding the Account
  • Transfer from another financial institution
  • Transfer from existing account
  • Mailed check
opening accounts online bsa considerations
Opening Accounts Online BSA Considerations

The FFIEC BSA/AML Examination Manual states the following regarding online identification

“Banks engaging in transactional Internet banking should

have effective and reliable methods to authenticate a cust-

omer’s identity when opening accounts on-line and should

establish policies for when a customer should be required to

open accounts on a face-to-face basis.”

*The Manual also makes reference to Authentication in an Internet Banking Environment issued by the FFIEC, October 13, 2005

online statements things to consider
Online StatementsThings to Consider

Other than E-Sign, no restrictions exist on the method of providing electronic periodic statements as long as periodic statements are provided within the specified times and in a form that consumer may keep

*E-Sign disclosures are required

online payments bill pay disclosure pitfall
Online Payments Bill Pay Disclosure Pitfall
  • Disclosures must be given in close proximity to the event requiring disclosure, e.g., when the consumer contracts for bill pay services
  • Initial disclosure are usually provided when consumers sign up for online banking
  • If bill pay services are subsequently obtained, new disclosures are frequently overlooked
getting it wrong the consequences
Getting it WrongThe Consequences
  • A consumer may only be held liable, within the limitations of Regulation E if the financial institution has provided the initial account disclosures
  • Consumers are liable for transactions that occur 60 days after transmittal of periodic statement (but what if that statement is not properly sent)

Not accurately providing the required Regulation E disclosures can have significant consequences

website compliance advertising deposit accounts
Website Compliance Advertising Deposit Accounts
  • If a website displays a triggering term (APY or a bonus), the additional required disclosures must be provided
  • Do not have to be on same page, but must be a clear reference to where the disclosures begin
  • This can include a link that takes the consumer directly to additional information
website compliance apys and interest rates
Website Compliance APYs and Interest Rates
  • While the disclosures triggered by an APY may be accessed via link, if an APY and interest rate are disclosed, they must be provided together
  • Section 230.8(b) prohibits interest rates from being stated alone or from being stated more conspicuously than the APY to which it relates
website compliance overdraft privilege
Website Compliance Overdraft Privilege

Proposed rule on Regulation

DD includes new comment

to clarify rules that apply to

advertising disclosures also

apply to the advertisement

of overdraft protection

If advertisement promotes overdraft service, it must also disclose

  • Fee or fees for overdraft
  • Categories of transactions for which fees imposed
  • Time period to repay
  • Circumstance bank will not pay
website compliance closed end triggering terms
Website Compliance Closed-End Triggering Terms

The following terms, if used on a bank’s website,

require the disclosure of additional terms

  • The number of payments or period of repayments
  • The amount of any payment
  • The amount of any finance charge

“We offer consumer loans with terms of 5 to 30 years!”

website compliance advertising helocs
Website Compliance Advertising HELOCs

For home equity line of credit advertisements, affirmative as well as negative terms trigger the additional disclosure requirements, so the following statements trigger additional disclosures

No closing costs!

No points!

No annual fee!

new payment methods payroll cards
New Payment MethodsPayroll Cards
  • Beginning 7/1/07, “payroll card accounts” became covered by Regulation E
  • A “payroll card account” is defined as an account that is directly or indirectly established through an employer and to which electronic fund transfers of the consumer’s wages, salary or other employee compensation (such as commission) are made on a recurring basis
new payment methods stored value cards
New Payment MethodsStored Value Cards
  • Not covered by Regulation E
  • Customer may have $0 liability through Visa
  • OCC and OTS have issued “gift card” guidance
  • Have BSA implications
electronic check conversion initial disclosure for regulation e
Electronic Check ConversionInitial Disclosure for Regulation E

Regulation E changes effective 1/1/07, required initial disclosures for Regulation E to identify electronic check conversion (ECK) transactions as a type a consumer can make

electronic check conversion revised model language
Electronic Check ConversionRevised Model Language

The FRB issued the following model language to satisfy the ECK disclosure requirement

“Electronic check conversion. You may authorize a

merchant or other payee to make a one-time electronic

payment from your checking account using information

from your check to:

(i) Pay for purchases

(ii) Pay bills”

electronic check conversion revised model language35
Electronic Check ConversionRevised Model Language

Existing model language was also modified relating to the consumer liability [205.7(b)(1)] and the telephone and address requirement [205.7(b)(2)]

“Tell us AT ONCE if you believe your [card] [code] has been

lost or stolen, or if you believe that an electronic fund transfer

has been made without your permission using information from

your check.”

electronic check conversion revised model language36
Electronic Check ConversionRevised Model Language

“If you believe your [card] [code] has been lost or stolen, call:

[Telephone number] or write: [Name of person or office to be

notified] [Address]

You should also call the number or write to the address listed

above if you believe a transfer has been made using the information

from your check without your permission.”

electronic check conversion collecting loan payments via ach
Electronic Check ConversionCollecting Loan Payments Via ACH
  • Effective 1/1/07, financial institutions that convert checks to electronic funds transfers, e.g., to collect loan payments, using the information on checks must provide notice to consumers for each conversion
electronic check conversion collection of mortgage payments
Electronic Check ConversionCollection of Mortgage Payments
  • Coupon Books – ECK disclosures placed in a conspicuous location on a coupon book are deemed to be placed on each coupon for purpose of obtaining a consumer’s authorization
  • Periodic Statements – If periodic statements or billing statements are sent, disclosures must be provided on each statement
contact information
Contact Information

Sean J. Kulczycki, CRCM